Does Fidelity Matter? (Part II)

Eric Wiesen

A few months back I wrote a post called “Does Fidelity Matter”. I considered the question of whether or not fidelity in audio/visual media (meaning faithful recreation of the source – and having nothing to do with marriage in this context) was still important in an age where convenient formats were increasingly dominant. In that post I concluded that fidelity still matters, but to a shrinking minority of purists like me (and even I don’t truthfully fall into the realm of the faithful, since I listen to compressed music and occasionally watch Time Warner Cable’s near-unwatchable on-demand offerings). For the mainstream user, music compressed to 8% of its original data size, compressed video on YouTube and 2-inch screens seem increasingly acceptable.

But my original thought (before I got sidetracked by my interest in home theater) was actually whether fidelity mattered in a different segment of digital media – information. News. I had been hearing (and continue to hear) that “old media”, (which in my view means professional producers and reporters of news content) is dead dead dead, and is being replaced by newer formats and distribution venues. The ones that get mentioned the most frequently are Facebook and Twitter (but before they were the soups du jour, the same commentary existed about blogs).

I thought about a few things as I considered a world where Facebook and Twitter replaced the New York Times, 60 Minutes and NPR. I am an active user of both of these services, and find each valuable for certain parts of my digital life. But as I thought about this, I couldn’t shake the idea that if Facebook and Twitter are the substitute we’re getting for our traditional media sources, we’re getting an unbelievably raw deal.

User-generated content is fascinating and, in certain circumstances, of intense value. If I want to pick a restaurant, I’m likely to turn to user-generated sources. Problem with my computer (or blu-ray player…)? It’s far more likely that the answer lies in a forum, rather than hope that a professional has taken the time to address my particular concern. User-generated content massively expands the scope of what gets covered. Whereas Frank Bruni might refer a restaurant every week (and who knows if he happened to be there on a particularly good or a particularly bad night?), I can read 200 reviews on Yelp for wherever I’m hoping to go (at least if I’m going out in San Francisco or south of 14th Street in New York). There’s no question that huge value is generated by enlarging the corpus of subjects covered by UGC.

But in my view the fidelity of news goes down a lot when it’s generated by the consumers of news media rather than the producers. There’s more of it, no question. And it’s potentially faster-moving, and that can be good too. But on issues that matter, the likelihood of a random person generating accurate, thoughtful coverage is, in my experience, dramatically lower than what I think we can reasonably expect from trained, full-time reporters and editors.

An example frequently brought up to illustrate Twitter’s world-dominating awesomeness is the plane crash in the Hudson River in January. I, like most users of Twitter, heard about the crash on Twitter first, at least 15 minutes before the story broke on the networks or major online media sites like CNN.com or the New York Times’ website. And that’s great. Except for one problem. The first tweet I saw that mentioned the crash had the plane landing in the Bronx. The second had it landing in upper Manhattan. Then the Bronx again. Eventually the famous twitpic image came up and the Twitter zeitgeist figured out that the plane had landed in the Hudson. And indeed, it was still a few minutes before the story was mainstream knowledge.

But to me, this is a real question – how much fidelity do we sacrifice by crowdsourcing our news? Are we as a culture satisfied with the tradeoffs we make in accuracy, thoughtfulness and thoroughness to get greater coverage or greater immediacy? I’m interested to hear viewpoints on this topic, but for my part I think we can ill afford to just crank up the noise level at the expense of quality. I say this not to be hidebound or backward-looking, but because the job of condensing a world of ever-increasing complexity is just that – a job. And I value the product that emerges from the work of professional journalists, even though it is (of course) imperfect in a variety of ways.

Perhaps the conclusion here is the same as the one I made in May – that fidelity matters only to a shrinking number of us, and that the rest are happy to live in an echo-chamber, but I think and hope this isn’t true. As I continue to read stories (mostly by parents) of how today’s teenagers know nothing of news or the world beyond celebrity and entertainment (of which there is no shortage on Facebook and Twitter), I find myself wishing not for my generation’s woeful relationship with news, but earlier generations who read the old, smudgy newspapers that, for all their flaws, had a higher signal to noise ratio than the deluge we experience today.

Respect

Stuart Ellman

My friend and former student, Mark Davis, recently sent a link to a Wall Street Journal article titled The Venture Capitalists That Aren’t Jerks (referencing Mark’s quality post by the same title). The article made mention of VC rankings published by TheFunded.com, and because of that site’s membership requirements, the rankings reflect ratings given to VCs by actual entrepreneurs. I was ranked number 8 and my partner, Jim Robinson III, was ranked number 4. More than most accolades or mentions in newspapers, this one really meant something to me. Why? Because it talks about respect, both the way I have tried to live my life and the culture we have worked to create and maintain here at RRE.

My first job out of college was at Dillon, Read & Co. Inc. The firm was a prestigious, white shoe investment bank and the CEO was Nicholas “Nick” Brady. Nick was the CEO for my first three months and then went to become the Treasury Secretary in the first Bush administration. There was a very specific pecking order at the bank. Investment bankers were at the top, from most senior to least. Managing Director, then SVP, then VP, then Associates, then the lowly Financial Analysts. Below all the investment bankers were the sales and trading guys (and they were mostly guys). Below the trading floor was the administrative staff. And at the very bottom were the guys that worked in the print shop. I remember a cranky, elderly gentlemen who ruled the print shop. All the junior investment bankers treated him poorly. But there was always the rumor that he was friends with Nick Brady and could go right to him. Why? Because Nick treated everyone with respect, down to the guys in the print shop. That stuck with me.

When I co-founded RRE in 1994, I was still 27 years old. Our culture of respect really stems from James D. Robinson IV (J4) and James D. Robinson III (J3). J4 is simply the most decent person I know. I was always amazed how a kid who grew up in NYC with a Fortune 500 CEO father could be so down to earth, nice, and smart. But he is. I also need to spend a few minutes talking about James D. Robinson III. He is the epitome of a true Southern Gentleman. I remember hearing stories about when he was the CEO of American Express. He really took the time to know everyone’s name, including the security guards who let him in the building every day. He treats everyone with respect and people love him for it. His trainers, his drivers, and everyone who works for him feels, and is, special to him. I like to think our culture was built around this paradigm: Don’t do anything that you don’t want to see on the front page of the Wall Street Journal. And give everyone the respect and attention that they deserve. J3 is a special man and I thank him for teaching me so many important things.

This means many things to me on a day to day basis. Always return voice mails and emails on a timely basis. Always pay attention and give at least an hour to anybody that is presenting a business to our partnership. Always do the right things for our shareholders and use appropriate corporate governance. Now, I am sure that there will be people that comment to this blog saying that I never responded to an email or that somebody at RRE treated them badly. Nobody is perfect, but I can tell you, there is no surer way to end your career at RRE than to treat visitors poorly.

When it comes to respect, NYC is a tough place and venture capital is a tough industry. In NYC, everybody likes to think they are competing against everybody else and this manifests itself as a lack of respect to others. Few things make me madder than seeing somebody act very rude to a waiter/waitress or a cab driver. Why? Just because they can. Because those in certain service industries have little choice but to take the abuse. I see the same things in venture capital. Some VC’s feel that they are doing entrepreneurs a favor by hearing their pitch. Why? I don’t get it. The best entrepreneurs are doing VC’s a favor by showing them their deals. There is no reason for arrogance on either side. But for people that think VC’s never receive this treatment, they forget that we have to raise money for our funds. Here I see the same thing. The biggest mistake a young person can make is to confuse “the power of the pen” with earned respect. By this I mean that younger executives that work for large companies that have the power to put large amounts of money to work or can create important partnerships can sometimes forget that it is their “pen” or their ability to use their corporate power that causes people to pay undue attention to them. I will always remember a young guy who worked for a well known Fortune 500 company that did a lot in the venture industry. Every Partner at every big name VC firm would call him back immediately. He started telling me that he was so special that he was going to quit his job and would be inundated with job offers from large VC firms because they all respected him so much. So, he quit, and because he had no power over them any longer, nobody returned his phone calls. He stayed unemployed for a long time.

I know the world is not perfect but there should be no pecking order between VC’s and entrepreneurs. Nor should there be a pecking order between LP’s and VC’s. Everybody is just trying to do a tough, risky job in a difficult environment. So treat everybody well, it is not so hard. And don’t forget about karma; what comes around goes around.

Hard Work

Stuart Ellman

I am a big believer in working hard. All throughout elementary school, high school, college and grad school I always thought I had to work twice as hard as everyone else to do well. This fear instilled a great work ethic in me to which I attribute much of my academic success. When I worked as a management consultant for McKinsey, I observed the same thing. While many skills are needed to be an excellent management consultant, there was a clear correlation between those who worked hard and those who excelled. Later, as an investment banker for Dillon Read, hard work was an even clearer path to success. Many of the bankers practically lived in the office. More pitches equaled more transactions equaled success. Then, 15 years ago, I became a venture capitalist. I am sorry to say that this maxim which controlled much of my life is not valid in venture capital.

I always remember one particular venture capitalist who seemed to work every waking hour. He was constantly dragging around a huge wheeled briefcase which contained his always expanding work. Funny thing was, none of his deals worked. This became a self fulfilling prophecy for him. The more deals that went badly, the more work he put into them. A venture capitalist with all bad deals needs to work non-stop to keep them alive. But, this does not make him/her a good venture capitalist. Successful deals do.

I then began to notice something special about my most successful deals. They started to take on a life of their own. They had management teams that knew how to access quickly rising markets and the ability to get the right projects into those markets. I specifically remember WatchGuard Technologies in the late 1990’s. Chris Slatt and Steve Moore just knew what they were doing. When something went wrong, they solved it. The other board members, Chad Waite and Andy Verhalen, were pleasures to work with. I loved going out to board meetings. I figured out how I could help the company with specific relationships, by they in banking, sales, or partnerships, but otherwise WatchGuard just did not take up much of my time. This deal returned most of my first fund.

On the other hand, I was working like a dog on some companies that were going nowhere. The light bulb went off. I was a good VC because I found deals like WatchGuard, not because I was working hard on deals that didn’t work. I will always remember another company that was performing well. One of the VCs on the Board thought to add value by insisting on a weekly sales update meeting. The CEO came to me prviately and asked me to get that VC off his back. Management wanted to spend their time closing deals, not talking to their investors. That case showed me that VCs trying to work hard may end up micromanaging companies that do not need it and can actually subtract value.

Recyclebank has been an fascinating company to work with. I believe Recyclebank will be one of the most successful companies in which I have ever invested. When we started, it was a ton of work. The CEO and founder, Ron Gonen, had been my student at Columbia Business School. The system that Ron and his team had created to pay people to recycle their garbage was ingenious and innovative. I fell in love with it. But as transformative an idea as it was, there were a lot of problems with the deal. I have never worked so hard on a deal BEFORE I actually invested. The company was set up as an LLC instead of a corporation. Virtually no employees owned options in the company. The cash compensation was out of control. The current Board was trying to lock up the CEO to a multi-year employment contract where his bonus was a percentage of EBITDA. The VP of Marketing was a full time professor being paid a high hourly rate to create studies. An early strategic investor was causing huge issues. I actually had to get the company to agree to not sign any deals or documents until after our investment was closed.

I knew we were going to need a strong investor syndicate to see this highly promising company all the way to the finish line. I quickly contacted Bob Davoli from Sigma to come in with me as co-investor. I then got Bob and the company to agree to hire a President, Matt Tucker, who had been a former CEO of another portfolio company of mine. Those two months before it actually closed were a ton work. But everything got straightened out and set up right. Since then, the company has been on an absolute tear. It has signed huge deals, monster partnerships and is showing amazing numbers and growth. The entire management team has been a pleasure to work with. Both Kleiner Perkins and Coca-Cola have come in as investors in subsequent rounds and they have been terrific, adding huge value to the company as it grows. I give a shout out to Trae Vassalo and Ted Schlein here.

As for me, the better things go, the better the team is, the less of my time it needs. More and more people that know me are going to work there. Alexa du Pont Bell, a superstar who worked for me for 4 years at RRE, now runs all online revenues at Recyclebank. But I hear from them only every few weeks. Mostly it is to hear about the huge deals they are signing. When Ron called me a few weeks ago, I realized that I had only seen him at board meetings for the past 6 months. This really bothered me; I wondered if I was just becoming lazy or was I ignoring this great company. That is when I saw the light. When companies have great management teams and are making huge strides in hot markets, give them room. Help them, do not bug them. If there is something specific you can do, do it. But don’t make up time consuming events just to make you as the VC feel like you are adding value by putting in the time. A VCs job is to find great deals and make money for their limited partners. If the company needs help, help it and put in the time. But remember, hard work does not make you a great investor, great investments do.